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Oil, Gold, Timber, And The Loonie

Mainers love loons. We put them on our license plates, sell them in our gift shops, and adorn our homes and camps with them. We do this for good reason: They are the ultimate embodiment of a tranquil summer night. It’s ironic, then, that in the forest products industry, the loon has become a recent source of Ire and the embodiment of only ferocious market volatility. The loon I speak of is of course the loonie—Canada’s dollar. Since mid-2012, the loonie has been declining against its US dollar counterpart, and as I write this, it sits at about 70 cents versus USD. At first glance, a strong US dollar sounds great, and in many ways it is—American tourists can now enter Canada with more purchasing power than they previously would have been able to, and it would signal, at least in theory, a strong US economy. But there is a dark side to that strength, and it has affected the way we sell wood.

Unfortunately for industries dependent on exports (or a lack of competitive imports), a strong dollar and weak loonie means it is less economic to export goods to Canada and more economic to import goods. In the case of forestry, Canada’s discounted exchange rate provides it a great position to be able to export its forest products into American markets, lowering the price of lumber and other products. It is a price decline that has put a dent in the bottom lines of forestry producers across the country. Regardless of any advantage or disadvantage that comes with it, however, a 30% dip in a short time period is a fairly extreme jump between the currencies of two developed markets, and with so much of Maine dependent on forest products, it is important to examine the reasons for the fluctuations and the exact impact these fluctuations have on the economy.

To make a generalization, the aggregate of a nation’s monetary supply derives its value from the goods its economy produces. Canada is a nation rich in resources, and its economy, subsequently, is highly dependent on the price of commodities. Both gold and oil are important industries for export in the north, and both have been declining—massively. Gold is down from its 2011 peak of around $1900/oz to $1100/oz today. Oil, just in case you drive a Tesla and haven’t noticed, has plummeted to levels not seen since before the Iraq War. Gold’s overall role in the loonie’s fall is perhaps slight, but oil’s impact is substantial. Compounding the issue is the US dollar’s notable (and predictably related) inverse relationship with crude, seen below.

Federal Reserve Economic Data

Amazingly, without hosting even a single pumpjack, Maine has felt real impacts from the decline in oil prices, as the price of oil has proven to be a proxy to a plethora of other commodities, including lumber. Moreover, the timing of this collapse is remarkably poor: As of October, 2015, the long-standing Softwood Lumber Agreement has expired. Beginning in 2006 and arising from concerns that Canadian producers were unfairly subsidized by the government, the SLA imposed a tariff of up to 15% on imported Canadian lumber during times when prices were low. Now unhindered, Canadian exports have ramped up, putting pressure on already-depressed prices.

When crude first crashed and gas prices fell, it appeared to be a blessing to loggers who saw their operating costs reduced, but it has proven to be a bittersweet song. S&P’s Forestry index is down 23% from last year, and many US publicly traded forestry companies, such as Potlatch (NASDAQ:PCH), have seen declines not realized outside of a recession. In Maine and the Northeast, the pulpwood market has been disproportionately affected due to the continued implosion of demand in the market. The outlook is not great, and it probably will not get any better soon. The SLA, often derided as unfounded protectionism, shows no signs of being renewed. Oil continues to slide, and with only scant rumors of production cuts, the bottom may not have been found. Additionally, the US dollar’s strength, independent of Canada, continues to garner strength as central banks around the world dive into negative interest rates while Janet Yellen tries to raise rates. Even if the loonie surged to parity tomorrow, there are other negative influences on the value of lumber, but I will discuss that in a future post. In the meantime, the mills, landowners, and loggers will carry on. Maine’s forest industry is no stranger to hard times, and the beauty in trees lies in the fact that they don’t seem care about market conditions—they tend to grow either way.